Loss warning sign of mounting woes at China shipyards

Everybody knows the shipbuilding industry in Asia is going through hard times, but just how bad appears to have even taken some of the experts by surprise.

Analysts who cover China Rongsheng Heavy Industries
/quotes/zigman/5080885/quotes/nls/cgvyyCGVYY/quotes/zigman/615073HK:1101 had been expecting the company to report a 584 million yuan ($93.76 million) net profit for 2012, according to a poll conducted by Thomson Reuters. Instead, China Rongsheng shocked many when it announced Monday that it expects to incur a net loss for 2012, citing falling orders and prices for new vessels as reasons.

During Thursday’s session, the first trading opportunity since the profit warning, the shares were knocked 7.4% lower, though they sat unchanged Friday morning in Hong Kong.

For the most part, the woes facing Rongsheng — China’s biggest private shipbuilder — had been well flagged. In the first half of 2012, global ship orders totaled 20.91 million tons worth of new vessels, a drop of 59% from the same period a year earlier.

Some analysts were even careful to point out that Rongsheng was especially at risk, as its single largest customer for very large ore carriers — Brazilian iron-ore producer Vale
/quotes/zigman/553117/quotes/nls/valeVALE — was likely to ask for delays in its ship orders currently pending.

A 400,000-ton iron ore carrier owned by Vale stirred up controversy last year when it docked at the mainland Chinese port of Dalian. China’s Ministry of Transport banned these huge bulk vessels and oil tankers from docking at its ports in February 2011 after lobbying by Chinese shipping companies worried about the deflationary effects on bulk-shipping rates.

“The shipping companies were worried about low freight rates in the future if Vale continued to transport minerals to China on its own,” Citic Securities said in note in February.

Vale has pending orders for 15 of these massive ore carriers with Rongsheng, according to Citic.

Delivery of the ships could be pushed back over a period extending through to 2016, according to Citic, which warned at the time of writing in February that the delays would pose “significant” earnings risk to Rongsheng.

Meanwhile, Citi Research, which initiated coverage of Rongsheng in a Dec. 10 report, warned investors to avoid the company’s shares.

Citing structural headwinds affecting the shipbuilding sector, the research house said orders for new ships could remain depressed for several more years due to the “severe excesses capacity” that exists as a result of the over-ordering between 2006 and 2008.

The global shipping fleet is expected to have grown 10% in 2012 — more than twice the rate of growth in seaborne trade — thanks to deliveries of ships that were ordered in the pre-crisis years, Citi said. The increase comes even as shipping companies retire older vessels at a record pace, according to Citi.

Meanwhile, other analysts noted that China’s state-owned shipyards weren’t helping the situation, as they have so far resisted scaling back shipbuilding capacity in spite of glut of cargo and ore carriers plying global trade routes.

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